Adamson Corporation is considering four average-risk projects with the following costs and rates of return:Expected Rate of ReturnTEProjectCost1$2,00016.00%23,00015.005,00013.7542,00012.50The company estimates that it can issue debt at a rate of ra = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $7.00 per year at $56.00 pershare. Also, its common stock currently sells for $41.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 6% per year.The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places.Cost of debt:%Cost of preferred stock:%Cost of retained earnings:%b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places.%c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?Project 1-Select- vProject 2-Select- vProject 3-Select- vProject 4-Select- v

WACC refers to weighted average cost of capital. It takes into account each component of capital and…

damson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return $2,000 16.00% 3,000 15.00 3 5,000 13.75 4 2,000 12.50 he company estimates that it can issue debt at a rate of rg = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $7.00 per year at $56. hare. Also, its common stock currently sells for $41.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 6% per he target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: Cost of retained earnings: % b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?

damson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return $2,000 16.00% 3,000 15.00 3 5,000 13.75 4 2,000 12.50 he company estimates that it can issue debt at a rate of rg = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $7.00 per year at $56. hare. Also, its common stock currently sells for $41.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 6% per he target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: Cost of retained earnings: % b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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DavidLee Corporation has $50 million in debt and $60 million in equity. The interest rate on the debt is 12% and a beta is 1.25. The corporate tax rate is 35% and the market risk premium is 6%, and the current t-bill rate is 4.5%. This firm is now to consider a $6.5 million investment project. Cash flow is expected to be about $665,000 per year for a fairly long period of time. Determine if this project is worthwhile to proceed
ABC Inc expects to have EPS (earning per share) of $5 in the coming year. The firms plan to pay all of its earning as a dividend. With this expectation of no growth the firm current share price is $50 per share. Suppose that ABC Inc decided to cut its dividend payout rate to 80% for the foreseeable future and use retaining earning for the new project. Return on this project is expected to be 15%. Assuming equity cost of capital is unchanged, what effect would this new policy have on ABC`s stock (what is the new price)?
Assume that in the optimal capital structure: Wp = 40%, wc = 50%, wp = 10%. Of the 50% that comes from common stock 80% will be generated internally through retained earnings; 20% through newly issued equity. Now we just have to estimate the costs of the individual funding sources, the rates. The marginal corporate tax rate is 30%. Use the following information to find rates: If new debt were issued it would have a coupon rate of 9%, a maturity of 10 years, and a face value of Tshs 1,000. It is expected that since investor's opportunity cost is also 9%, that the new debt could be sold at face value. Issue costs are Tshs 30/share. Newly issued preferred stock would have a par value of Tshs 50, a dividend of Tshs 6/share, and flotation costs of Tshs 1.75/share. Assume that this newly issued preferred stock would be issued at par. i. ii. iii. The firm just issued a Tshs 5 dividend. Dividends are expected to grow at a rate of 10%/year, indefinitely. The current market price of common stock…
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 11% as long as it finances at its target capital structure, which calls for 40% debt and 60% common equity. Its last dividend (Do) was $1.75, its expected constant growth rate is 3%, and its common stock sells for $26. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 14%, and Project B's return is 8%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. .66 % b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. % c. Which projects should Empire accept? Project A V
A firm needs to raise $650 million for a project; external equity financing will be required. The firm faces flotation costs of 8.0% for equity and 2.0% for debt. If the debt to equity ratio is 0.75, the average flotation cost incurred by the firm will be ________ %
WACC Midwest Electric Company (MKC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd=10% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D0) was $2, its expected constant growth rate is 4% and its common stock sells for $20. MEC's Tax rate is 40% Two projects are available Project A has a rate of return of 13%, While Project B's return is 10% these two projects are equally risky and about as risky as the firms;s existing assests. a. What is its cost of common equity? b.What is the WACC? c. Which project should Midwest accept?
Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 11% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend (D) was $2.35, its expected constant growth rate is 6%, and its common stock sells for $29. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 12%, and Project B's return is 9%. These two projects are equally risky and about as risky as the firm's existing assets. a. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % b. What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places. % c. Which projects should Empire accept? -Select-
Blue Co. is trying to estimate its optimal capital structure. Currently, the firm has a capital structure that consists of 20% debt and 80% equity. The risk-free rate is 6% and the market risk premium is 5%. The company’s cost of equity is 12% under the capital asset pricing model approach and its corporate tax rate is 40%. What is the new levered beta if the capital structure will shift from its current structure to 50% debt and 50% equity? a. 1.67 b. 1.39 c. 1.49 d. 1.25
Jaguar Holdings Company can obtain debt funding at 8 percent. Its marginal income tax rate is 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm’s beta is 2. It has a targeted debt-to-equity ratio of 1:1 (25 percent debt, 75 percent equity). 1) What is its weighted average cost of capital? Jaguar Holdings Company must choose between solar and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The solar truck will cost more but will be less expensive to operate; it will cost $80,000, whereas the electric-powered truck will cost $70,000. The life for both types of truck is estimated to be 10 years, during which time the net cash flows for the solar-powered truck will be $20,000 per year, and those for the electric-powered truck will be $12,000 per year. 2) Calculate the NPV…
Cede & Co. expects its EBIT to be $163000 every year forever. The company can borrow at 8 percent. The company currently has no debt and its cost of equity is 10 percent. The tax rate is 23 percent. If the company borrows $185,000 and uses the proceeds to buy back equity, what is the weighted average cost of capital after the recapitalisation is complete? Group of answer choices 9.67% 15.13% 14.32% 8.17%
A certain company must raise SR 220 million to fund its next project. 25% of the funds will come from a bank loan, which is charging 6.5%. 45% of the funds will come from issuing corporate bonds, at a rate of 4.5%. The remaining funds will be raised by selling preferred stock, with a promise of dividend payments of 7.8%. WACC:
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Cost Expected Rate of Return $2,000 16.00% 3,000 15.00 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 11%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $6.0 per year at $60.00 per share. Also, its common stock currently sells for $52.00 per share; the next expected dividend, D₁, is $5.75; and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. Project a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: 123 % Project 1 Project 2 Project 3 Project 4 Cost of preferred stock: Cost of retained earnings: b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two…

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